FORM 10-Q/MARCH 31, 1999
[LOGO] US BANCORP(R)
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from (not applicable)
Commission file number 1-6880
U.S. BANCORP
(Exact name of registrant as specified in its charter)
DELAWARE 41-0255900
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
U.S. BANK PLACE,
601 SECOND AVENUE SOUTH,
MINNEAPOLIS, MINNESOTA 55402-4302
(Address of principal executive offices and Zip Code)
612-973-1111
(Registrant's telephone number, including area code)
(NOT APPLICABLE)
(Former name, former address and former fiscal year,
if changed since last report).
-----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months and (2) has been subject to such filing
requirements for the past 90 days.
YES ___X___ NO _______
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
Class Outstanding as of April 30, 1999
Common Stock, $1.25 Par Value 726,906,462 shares
================================================================================
FINANCIAL SUMMARY
Three Months Ended March 31
----------------------------
(Dollars in Millions, Except Per Share Data) 1999 1998
- - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------------
Income before nonrecurring items ........................ $ 368.6 $ 350.0
Nonrecurring items ...................................... (1.8) (21.5)
---------------------------
Net income .............................................. $ 366.8 $ 328.5
===========================
PER COMMON SHARE
Earnings per share ...................................... $ .51 $ .44
Diluted earnings per share .............................. .50 .44
Earnings on a cash basis (diluted)* ..................... .56 .48
Dividends paid .......................................... .195 .175
Common shareholders' equity ............................. 8.50 8.25
PER COMMON SHARE BEFORE NONRECURRING ITEMS
Earnings per share ...................................... .51 .47
Diluted earnings per share .............................. .51 .47
Earnings on a cash basis (diluted)* ..................... .56 .51
---------------------------
FINANCIAL RATIOS
Return on average assets ................................ 1.98% 1.91%
Return on average common equity ......................... 24.4 22.1
Efficiency ratio ........................................ 50.6 49.9
Net interest margin (taxable-equivalent basis) .......... 4.82 4.98
SELECTED FINANCIAL RATIOS BEFORE NONRECURRING ITEMS
Return on average assets ................................ 1.99 2.03
Return on average common equity ......................... 24.6 23.5
Efficiency ratio ........................................ 50.4 46.1
Banking efficiency ratio** .............................. 43.3 45.2
===========================
March 31 December 31
1999 1998
---------------------------
PERIOD END
Loans ................................................... $ 59,619 $ 59,122
Allowance for credit losses ............................. 983 1,001
Assets .................................................. 76,110 76,438
Total shareholders' equity .............................. 6,177 5,970
Tangible common equity to total assets*** ............... 6.3% 6.0%
Tier 1 capital ratio .................................... 6.6 6.4
Total risk-based capital ratio .......................... 11.2 10.9
Leverage ratio .......................................... 7.0 6.8
====================================================================================
*CALCULATED BY ADDING AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS TO
NET INCOME.
**WITHOUT INVESTMENT BANKING AND BROKERAGE ACTIVITY.
***DEFINED AS COMMON EQUITY LESS GOODWILL AS A PERCENTAGE OF TOTAL ASSETS LESS
GOODWILL.
TABLE OF CONTENTS AND FORM 10-Q CROSS-REFERENCE INDEX
PART I -- FINANCIAL INFORMATION
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Item 2) ......................................................... 2
Quantitative and Qualitative Disclosures About Market Risk (Item 3) ......... 10
Financial Statements (Item 1) ............................................... 15
PART II -- OTHER INFORMATION
Changes in Securities (Item 2) .............................................. 26
Submission of Matters to a Vote of Security Holders (Item 4) ................ 26
Exhibits and Reports on Form 8-K (Item 6) ................................... 26
Signature ................................................................... 26
Exhibit 12 -- Computation of Ratio of Earnings to Fixed Charges ............. 27
FORWARD-LOOKING STATEMENTS
This Form 10-Q includes forward-looking statements that involve inherent
risks and uncertainties. U.S. Bancorp cautions readers that a number of
important factors could cause actual results to differ materially from those in
the forward-looking statements. These factors include economic conditions and
competition in the geographic and business areas in which the Company operates,
inflation, fluctuations in interest rates, legislation and governmental
regulation, and Year 2000 issues.
U.S. Bancorp 1
MANAGEMENT'S DISCUSSION AND ANALYSIS
EARNINGS SUMMARY U.S. Bancorp (the "Company") reported first quarter 1999
operating earnings (net income excluding nonrecurring items) of $368.6 million,
compared with $350.0 million in the first quarter of 1998. On a diluted per
share basis, operating earnings were $.51 in the first quarter of 1999, compared
with $.47 in the first quarter of 1998, an increase of 9 percent. On a diluted
per share basis, cash operating earnings were $.56 in the first quarter of 1999,
compared with $.51 in the first quarter of 1998, an increase of 10 percent.
Return on average assets and return on average common equity, excluding
nonrecurring items, were 1.99 percent and 24.6 percent, respectively, in the
first quarter of 1999, compared with returns of 2.03 percent and 23.5 percent in
the first quarter of 1998. Excluding nonrecurring items, the efficiency ratio
(the ratio of expenses to revenues) was 50.4 percent in the first quarter of
1999, compared with 46.1 percent in the first quarter of 1998.
Comparisons to the first quarter of 1998 are affected by the acquisition
of Piper Jaffray Companies Inc. ("Piper Jaffray") and several other small
acquisitions. Net interest income on a taxable-equivalent basis in the first
quarter of 1999 was higher by $25.4 million (3 percent) than the first quarter
of 1998. Noninterest income, before nonrecurring items, increased by $180.4
million (40 percent), primarily reflecting the acquisition of Piper Jaffray,
growth in trust and investment management fees and deposit service charges,
partially offset by the loss of a portion of the U.S. Government purchasing card
business. Noninterest expense, before nonrecurring items, increased by $156.8
million (28 percent), principally due to the acquisition of Piper Jaffray. The
banking efficiency ratio (the ratio of expenses to revenues without the impact
of investment banking and brokerage activity), before nonrecurring items, for
the first quarter of 1999 was 43.3 percent, compared with 45.2 percent in the
first quarter of 1998.
Net income was $366.8 million in the first quarter of 1999, or $.50 per
diluted share, compared with $328.5 million, or $.44 per diluted share, in the
first quarter of 1998. Nonrecurring merger-related charges decreased net income
in the first quarter of 1999 by $1.8 million ($2.9 million on a pre-tax basis)
compared to a decrease of $21.5 million ($33.9 million on a pre-tax basis) in
the first quarter of 1998. Nonrecurring items included $12.6 million of net
securities gains and $46.5 million of merger-related charges in 1998.
ACQUISITION AND DIVESTITURE ACTIVITY Operating results for the first quarter of
1999 reflect the following purchase transactions. On March 16, 1999, the Company
completed its acquisition of Reliance Trust Company's corporate trust business,
which operates offices in Georgia, Florida and Tennessee. Effective January 4,
1999, the Company acquired Libra Investments, Inc., a privately held Los Angeles
and New York based investment bank that specializes in underwriting and trading
high yield and mezzanine securities for middle market companies. On December 15,
1998, the Company completed its acquisition of Northwest Bancshares, Inc., a
privately held bank holding company headquartered in Vancouver, Washington, with
10 banking locations and $344 million in deposits. In May 1998, the Company
completed its acquisition of Piper Jaffray, a full-service investment banking
and securities brokerage firm.
On February 18, 1999, the Company announced an agreement to acquire the
San Diego-based Bank of Commerce, one of the largest U.S. Small Business
Administration ("SBA") lenders. With $638 million in assets at year-end 1998 and
SBA loan originations in excess of $240 million on an annual basis, Bank of
Commerce operates 10 full-service branches and 23 SBA loan production offices.
The acquisition is pending regulatory approval and is expected to close at the
end of the second quarter of 1999.
2 U.S. Bancorp
TABLE 1 SUMMARY OF CONSOLIDATED INCOME
Three Months Ended
-------------------------------
(Taxable-Equivalent Basis; March 31 March 31
Dollars In Millions, Except Per Share Data) 1999 1998
- - - - - - - - - - - - - - - - - --------------------------------------------------------------------------------------------------
Interest income ................................................. $ 1,362.7 $ 1,338.2
Interest expense ................................................ 569.3 570.2
-------------------------------
Net interest income ........................................... 793.4 768.0
Provision for credit losses ..................................... 117.0 90.0
-------------------------------
Net interest income after provision for credit losses ......... 676.4 678.0
Securities gains ................................................ -- 12.6
Other noninterest income ........................................ 626.3 445.9
Merger-related charges .......................................... 2.9 46.5
Other noninterest expense ....................................... 715.9 559.1
-------------------------------
Income before income taxes .................................... 583.9 530.9
Taxable-equivalent adjustment ................................... 10.7 13.1
Income taxes .................................................... 206.4 189.3
-------------------------------
Net income .................................................... $ 366.8 $ 328.5
===============================
Return on average assets ........................................ 1.98% 1.91%
Return on average common equity ................................. 24.4 22.1
Net interest margin ............................................. 4.82 4.98
Efficiency ratio ................................................ 50.6 49.9
Efficiency ratio before nonrecurring items ...................... 50.4 46.1
Banking efficiency ratio before nonrecurring items* ............. 43.3 45.2
===============================
PER COMMON SHARE:
Earnings per share .............................................. $ .51 $ .44
Dividends paid .................................................. .195 .175
==================================================================================================
*WITHOUT INVESTMENT BANKING AND BROKERAGE ACTIVITY.
LINE OF BUSINESS FINANCIAL REVIEW
Within the Company, financial performance is measured by major lines of
business, which include: Wholesale and Private Financial Services, Retail
Banking, Payment Systems, Corporate Trust and Institutional Financial Services,
and Investment Banking and Brokerage. These segments are determined based on the
products and services provided to customers through various distribution
channels. Business line results are derived from the Company's business unit
profitability reporting system. Designations, assignments, and allocations may
change from time to time as management accounting systems are enhanced or
product lines change. During first quarter 1999, certain organization and
methodology changes were made and 1998 results are presented on a consistent
basis.
WHOLESALE AND PRIVATE FINANCIAL SERVICES Wholesale and Private Financial
Services includes lending, treasury management, and other financial services to
middle market, large corporate and mortgage banking companies, and private
banking and personal trust clients. Operating earnings increased 5 percent to
$172.5 million in the first quarter of 1999, compared with $164.0 million in the
first quarter of 1998. Net tangible return on average common equity increased to
31.5 percent compared with 26.6 percent in the first quarter of the prior year.
Net interest income increased 3 percent, reflecting growth in average loan
and deposit balances partially offset by margin compression in both loans and
deposits. Noninterest income increased $3.7 million or 4 percent in the first
quarter of 1999 compared with the same period of the prior year, reflecting
increases in trust fees and deposit service charges. The efficiency ratio on a
cash basis improved to 31.1 percent in the first quarter of 1999 compared with
32.2 percent in the first quarter of 1998.
U.S. Bancorp 3
TABLE 2 LINE OF BUSINESS FINANCIAL PERFORMANCE
Wholesale and Private
Financial Services Retail Banking
--------------------------------------- -------------------------------------
For the Three Months Ended March 31 Percent Percent
(Dollars in Millions) 1999 1998 Change 1999 1998 Change
- - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------------------------------------------------
CONDENSED INCOME STATEMENT:
Net interest income (expense)
(taxable-equivalent basis) .................... $ 347.5 $ 336.4 3.3% $ 375.9 $ 368.1 2.1%
Provision for credit losses .................... 11.4 8.6 32.6 55.3 40.3 37.2
Noninterest income ............................. 87.3 83.6 4.4 135.4 133.8 1.2
Noninterest expense ............................ 148.6 146.7 1.3 260.7 270.5 (3.6)
Income taxes and
taxable-equivalent adjustment ................. 102.3 100.7 72.5 72.7
---------------------- ----------------------
Income before nonrecurring items ............... $ 172.5 $ 164.0 5.2 $ 122.8 $ 118.4 3.7
====================== ======================
Net nonrecurring items (after-tax) .............
Net income .....................................
AVERAGE BALANCE SHEET DATA:
Commercial loans ............................... $ 34,115 $ 30,689 11.2 $ 2,201 $ 2,126 3.5
Consumer loans, excluding
residential mortgage .......................... 725 600 20.8 13,840 11,938 15.9
Residential mortgage loans ..................... 354 288 22.9 2,671 3,831 (30.3)
Assets ......................................... 42,859 39,435 8.7 22,692 22,616 .3
Deposits ....................................... 11,768 10,877 8.2 34,068 34,932 (2.5)
Common equity .................................. 3,002 3,271 (8.2) 1,486 1,744 (14.8)
---------------------- ----------------------
Return on average assets ....................... 1.63% 1.69% 2.19% 2.12%
Return on average common equity ("ROCE") ....... 23.3 20.3 33.5 27.5
Net tangible ROCE** ............................ 31.5 26.6 55.8 43.7
Efficiency ratio ............................... 34.2 34.9 51.0 53.9
Efficiency ratio on a cash basis** ............. 31.1 32.2 48.4 51.5
=================================================================================================================================
*NOT MEANINGFUL.
**CALCULATED BY EXCLUDING GOODWILL AND OTHER INTANGIBLES AND THE RELATED
AMORTIZATION.
NOTE: NONRECURRING ITEMS ARE NOT ALLOCATED TO THE BUSINESS LINES. ALL RATIOS
ARE CALCULATED WITHOUT THE EFFECT OF NONRECURRING ITEMS.
RETAIL BANKING Retail Banking delivers products and services to the broad
consumer market and small businesses through branch offices, telemarketing,
direct mail, and automated teller machines ("ATMs"). Operating earnings
increased 4 percent in the first quarter. First quarter return on average assets
increased to 2.19 percent from 2.12 percent in the same quarter a year ago.
First quarter net tangible return on average common equity was 55.8 percent,
compared with 43.7 percent in the first quarter of the prior year.
Net interest income for the first quarter of 1999 increased 2 percent from
the first quarter of 1998, due primarily to growth in home equity loans
partially offset by the planned runoff of the residential mortgage loan
portfolio. Noninterest income increased 1 percent due primarily to increased
deposit service charges and other fees. The decrease in noninterest expense
reflected the benefits of continued streamlining of branch operations, as well
as the integration of recent business combinations. The efficiency ratio on a
cash basis improved to 48.4 percent in the first quarter of 1999 from 51.5
percent in the first quarter of the prior year.
PAYMENT SYSTEMS Payment Systems includes consumer and business credit cards,
corporate and purchasing card services, card-accessed secured and unsecured
lines of credit, ATM processing, and merchant processing. Operating earnings
increased 2 percent in the first quarter of 1999, compared with the first
quarter a year ago. First quarter return on average assets was 2.62 percent,
compared with 2.45 percent in the first quarter of 1998. Net tangible return on
average common equity was 43.6 percent compared with 44.2 percent for the same
quarter in 1998.
Net interest income increased 17 percent in the first quarter of 1999 from
the same period of the prior year due to lower corporate card and purchasing
card non-earning asset balances as well as higher yields on retail card
balances. Fee revenue was flat from the first quarter of 1998, reflecting the
loss of a portion of the U.S. Government purchasing card business. Noninterest
expense decreased $2.5 million or 3 percent from the prior year due primarily to
lower servicing expense. The efficiency ratio on a cash basis improved to 36.0
percent in the first quarter from 37.7 percent for the same quarter in 1998.
4 U.S. Bancorp
Corporate Trust and Investment Banking Consolidated
Payment Systems Institutional Financial Services and Brokerage Company
- - - - - - - - - - - - - - - - - ----------------------------- -------------------------------- ---------------------------- -----------------------------
Percent Percent Percent Percent
1999 1998 Change 1999 1998 Change 1999 1998 Change 1999 1998 Change
- - - - - - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------------------------
$ 55.7 $ 47.6 17.0% $ 15.7 $ 14.6 7.5% $ (1.4) $ 1.3 * $ 793.4 $ 768.0 3.3%
50.3 41.1 22.4 -- -- -- -- -- -- 117.0 90.0 30.0
132.7 133.7 (.7) 75.2 69.0 9.0 195.7 25.8 * 626.3 445.9 40.5
72.8 75.3 (3.3) 48.1 43.5 10.6 185.7 23.1 * 715.9 559.1 28.0
24.3 24.7 15.9 15.2 3.2 1.5 218.2 214.8
- - - - - - - - - - - - - - - - - ------------------ ----------------- ------------------ -------------------
$ 41.0 $ 40.2 2.0 $ 26.9 $ 24.9 8.0 $ 5.4 $ 2.5 * 368.6 350.0 5.3
================== ================= ==================
(1.8) (21.5) *
-------------------
$ 366.8 $ 328.5 11.7
===================
$1,188 $1,254 (5.3) $ -- $ -- -- $ -- $ -- -- $37,504 $34,069 10.1
3,987 3,931 1.4 -- -- -- -- -- -- 18,552 16,469 12.6
-- -- -- -- -- -- -- -- -- 3,025 4,119 (26.6)
6,337 6,664 (4.9) 744 523 42.3 2,475 583 * 75,107 69,821 7.6
120 66 81.8 1,664 1,412 17.8 -- -- -- 47,620 47,287 .7
571 582 (1.9) 589 379 55.4 439 60 * 6,087 6,036 .8
- - - - - - - - - - - - - - - - - ------------------ ----------------- ------------------ -------------------
2.62% 2.45% * * * * 1.99% 2.03%
29.1 28.0 18.5% 26.6% 5.0% 16.9% 24.6 23.5
43.6 44.2 45.4 45.2 41.9 18.0 39.6 33.6
38.6 41.5 52.9 52.0 95.6 85.2 50.4 46.1
36.0 37.7 49.8 48.7 93.7 85.2 47.8 43.3
===================================================================================================================================
CORPORATE TRUST AND INSTITUTIONAL FINANCIAL SERVICES
Corporate Trust and Institutional Financial Services includes institutional and
corporate trust services, investment management services, and the former Piper
Capital Management acquired in May of 1998. Operating earnings increased 8
percent to $26.9 million in the first quarter of 1999 compared with $24.9
million in the same period of the prior year. Net tangible return on average
common equity was 45.4 percent in the first quarter of 1999 compared with 45.2
percent in the first quarter of the prior year.
Net interest income increased 8 percent in the first quarter of 1999 from
the same period of the prior year due to growth in average deposit balances.
Noninterest income increased $6.2 million or 9 percent from the first quarter of
1998 due to growth in asset management fees and the acquisition of Piper Capital
Management. The increase in noninterest expense reflects the acquisition of
Piper Capital Management and growth of the core business.
INVESTMENT BANKING AND BROKERAGE Investment Banking and Brokerage includes the
U.S. Bancorp Piper Jaffray broker/dealer and U.S. Bancorp's existing
broker/dealer operations. The U.S. Bancorp Piper Jaffray broker/dealer is a
full-service brokerage company that was acquired as part of the acquisition of
Piper Jaffray on May 1, 1998. Table 2 includes the results of the U.S. Bancorp
Piper Jaffray broker/dealer since the acquisition date, including the
amortization of intangible assets and employee retention programs (totaling $9.0
million in the first quarter of 1999), and U.S. Bancorp's existing broker/dealer
operations for all periods.
INCOME STATEMENT ANALYSIS
NET INTEREST INCOME First quarter net interest income on a taxable-equivalent
basis was $793.4 million compared with $768.0 million in the first quarter of
1998. The first quarter average earning assets increased $4.2 billion (7
percent) from the same period of 1998, driven by core commercial and consumer
loan growth and consumer loan portfolio purchases completed in the latter part
of 1998, partially offset by reductions in securities and residential mortgages.
Average loans for the first quarter of 1999 were up 8 percent from the first
quarter of 1998. Excluding residential mortgage loans, average loans for the
first quarter of 1999 were higher by $5.5 billion (11 percent) than the first
quarter of 1998, reflecting
U.S. Bancorp 5
TABLE 3 ANALYSIS OF NET INTEREST INCOME
Three Months Ended
----------------------
March 31 March 31
(Dollars In Millions) 1999 1998
- - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------------------
Net interest income, as reported ......................................... $ 782.7 $ 754.9
Taxable-equivalent adjustment .......................................... 10.7 13.1
----------------------
Net interest income (taxable-equivalent basis) ........................... $ 793.4 $ 768.0
======================
Average yields and weighted average rates (taxable-equivalent basis):
Earning assets yield ................................................... 8.28% 8.67%
Rate paid on interest-bearing liabilities .............................. 4.35 4.75
----------------------
Gross interest margin .................................................... 3.93% 3.92%
======================
Net interest margin ...................................................... 4.82% 4.98%
======================
Net interest margin without taxable-equivalent increments ................ 4.76% 4.89%
===================================================================================================
strong growth in commercial loans and home equity and second mortgages, in
addition to the consumer loan portfolio purchases. Without the portfolio
purchases, average total consumer loans were 4 percent higher than first quarter
of 1998. Average available-for-sale securities for the first quarter of 1999
decreased by $1.3 billion from the first quarter of 1998, reflecting
prepayments, maturities and sales of securities. Net interest income rose
modestly, due to loan growth offset by additional funding required for the Piper
Jaffray acquisition, the share repurchase program, margin compression in the
commercial loan portfolio, and an increase in the portion of loan growth funded
in the wholesale markets. As a result, the net interest margin decreased from
4.98 percent in the first quarter of 1998 to 4.82 percent in the first quarter
1999.
PROVISION FOR CREDIT LOSSES The provision for credit losses was $117.0 million
in the first quarter of 1999, up $27.0 million (30 percent) from the first
quarter of 1998. First quarter net charge-offs totaled $139.6 million, up from
$103.2 million in the same period of 1998. The increase in net charge-offs
reflects a $12.5 million credit loss on a single commercial credit, growth in
consumer loans, a $7 million increase in credit card and overdraft fraud losses
and $13 million of losses which were anticipated in association with portfolios
purchased in 1998. Refer to "Corporate Risk Management" for further information
on credit quality.
NONINTEREST INCOME First quarter 1999 noninterest income was $626.3 million, an
increase of $167.8 million (37 percent), from the first quarter of 1998.
Noninterest income in the first quarter of 1998 included nonrecurring net
securities gains of $12.6 million.
Excluding nonrecurring items, first quarter 1999 noninterest income was
$626.3 million, an increase of $180.4 million (40 percent) from the same quarter
of 1998. Credit card fee revenue was flat from the first quarter of 1998,
reflecting the loss of a portion of the U.S. Government purchasing card
business. Trust and investment management fees increased $22.3 million, or 23
percent, due to growth in the institutional and personal trust businesses and
the addition of Piper Jaffray. Investment products fees and commissions, trading
account profits and commissions and investment banking revenue increased,
reflecting the acquisition of Piper Jaffray.
TABLE 4 NONINTEREST INCOME
Three Months Ended
---------------------
March 31 March 31
(Dollars In Millions) 1999 1998
- - - - - - - - - - - - - - - - - --------------------------------------------------------------------------------------------------
Credit card fee revenue .................................................. $ 126.8 $ 126.8
Trust and investment management fees ..................................... 117.2 94.9
Service charges on deposit accounts ...................................... 103.4 97.9
Investment products fees and commissions ................................. 88.6 18.2
Trading account profits and commissions .................................. 51.5 7.1
Investment banking revenue ............................................... 36.2 --
Securities gains ......................................................... -- 12.6
Other .................................................................... 102.6 101.0
---------------------
Total noninterest income .............................................. $ 626.3 $ 458.5
==================================================================================================
6 U.S. Bancorp
TABLE 5 NONINTEREST EXPENSE
Three Months Ended
------------------------
March 31 March 31
(Dollars In Millions) 1999 1998
- - - - - - - - - - - - - - - - - -----------------------------------------------------------------------------------------------
Salaries ........................................................... $ 354.1 $ 239.6
Employee benefits .................................................. 70.0 54.1
------------------------
Total personnel expense .......................................... 424.1 293.7
Net occupancy ...................................................... 50.0 43.5
Furniture and equipment ............................................ 38.1 35.4
Goodwill and other intangible assets ............................... 37.8 33.4
Telephone .......................................................... 18.0 15.5
Third party data processing ........................................ 16.3 14.0
Postage ............................................................ 15.1 10.8
Advertising and marketing .......................................... 15.0 15.7
Professional services .............................................. 14.0 11.3
Printing, stationery and supplies .................................. 13.0 9.1
Other personnel costs .............................................. 12.7 13.1
FDIC insurance ..................................................... 2.0 2.0
Merger-related ..................................................... 2.9 46.5
Other .............................................................. 59.8 61.6
------------------------
Total noninterest expense ........................................ $ 718.8 $ 605.6
========================
Efficiency ratio* .................................................. 50.6% 49.9%
Efficiency ratio before nonrecurring items ......................... 50.4 46.1
Banking efficiency ratio before nonrecurring items** ............... 43.3 45.2
Average number of full-time equivalent employees ................... 27,040 24,815
===============================================================================================
*COMPUTED AS NONINTEREST EXPENSE DIVIDED BY THE SUM OF NET INTEREST INCOME ON
A TAXABLE-EQUIVALENT BASIS AND NONINTEREST INCOME NET OF SECURITIES GAINS AND
LOSSES.
**WITHOUT INVESTMENT BANKING AND BROKERAGE ACTIVITY.
NONINTEREST EXPENSE First quarter 1999 noninterest expense was $718.8 million,
an increase of $113.2 million (19 percent), from $605.6 million in the first
quarter of 1998. Noninterest expense in the first quarter of 1999 included
nonrecurring merger-related charges of $2.9 million, compared with
merger-related charges of $46.5 million in the first quarter of 1998. The
Company expects to incur $17 million ($11 million after-tax) of additional
merger-related expenses with respect to Piper Jaffray in 1999.
First quarter 1999 noninterest expense, before nonrecurring items, was
$715.9 million, an increase of $156.8 million (28 percent), from $559.1 million
in the first quarter of 1998. The increase was principally the result of
acquiring Piper Jaffray. Without the effect of acquisitions, expenses in the
first quarter of 1999 were lower than the first quarter of 1998 primarily
reflecting the expense savings from the integration of U.S. Bancorp of Portland,
Oregon. The banking efficiency ratio (the ratio of expenses to revenue without
the impact of investment banking and brokerage activity), before nonrecurring
items, was 43.3 percent for the first quarter of 1999, compared with 45.2
percent for the first quarter a year ago.
Since 1996, the Company has undertaken efforts to address the "Year 2000"
computer problem as discussed in further detail on pages 12 and 13 under
Corporate Risk Profile. In connection with its Year 2000 project, the Company
has substantially completed the evaluation, replacement, renovation,
installation and testing of its critical internal computer hardware and software
and embedded technologies. Remediation and testing of non-critical systems
continues to progress and is expected to be completed during 1999. The Company
estimates that the cost of its Year 2000 project will aggregate less than $50
million over the three-year period ending December 31, 1999. The Company has not
deferred any material information technology projects as a consequence of its
Year 2000 efforts.
PROVISION FOR INCOME TAXES The provision for income taxes was $206.4 million (an
effective rate of 36.0 percent) in the first quarter of 1999, compared with
$189.3 million (an effective rate of 36.6 percent) in the first quarter of 1998.
The increase in the provision was primarily the result of higher levels of
taxable income, as discussed above.
BALANCE SHEET ANALYSIS
LOANS The Company's loan portfolio was $59.6 billion at March 31, 1999, compared
with $59.1 billion at December 31, 1998. Commercial loans totaled $38.2 billion
at March 31, 1999, up $961 million from
U.S. Bancorp 7
December 31, 1998. The increase was primarily attributable to an acceleration in
growth in the Company's Western region and continued growth in core commercial
loans in its Central region. Total consumer loan outstandings were $21.4 billion
at March 31, 1999, compared with $21.9 billion at December 31, 1998. Excluding
residential mortgage loan balances, consumer loans were $18.5 billion at March
31, 1999, compared with $18.7 billion at December 31, 1998, reflecting seasonal
changes in credit card balances offset by improved retail sales in the Western
region. See Note E of the Notes to Consolidated Financial Statements for the
composition of the Company's loan portfolio at March 31, 1999, and December 31,
1998.
SECURITIES At March 31, 1999, available-for-sale securities were $5.3 billion
compared with $5.6 billion at December 31, 1998, reflecting prepayments,
maturities and sales of securities.
DEPOSITS Noninterest-bearing deposits were $14.2 billion at March 31, 1999,
compared with $16.4 billion at December 31, 1998. The decrease was primarily due
to seasonality of corporate and trust deposits. Interest-bearing deposits
increased to $34.5 billion at March 31, 1999, compared with $33.7 billion at
December 31, 1998, due to an increase in time certificates greater than
$100,000.
BORROWINGS Short-term borrowings, which include federal funds purchased,
securities sold under agreements to repurchase and other short-term borrowings,
increased to $4.2 billion at March 31, 1999, compared with $3.4 billion at
December 31, 1998, primarily due to an increase in federal funds purchased.
Long-term debt was $13.8 billion at March 31, 1999, and December 31, 1998.
The Company issued $300 million of debt, with an average original maturity of
2.1 years, under its bank note program during the first quarter of 1999. These
issuances were offset by $274 million of medium-term and bank note maturities
and $28 million of Federal Home Loan Bank advance maturities.
CORPORATE RISK MANAGEMENT
CREDIT MANAGEMENT The Company's strategy for credit risk management includes
stringent, centralized credit policies, and standard underwriting criteria for
specialized lending categories, such as mortgage banking, real estate
construction, and consumer credit. The strategy also emphasizes diversification
on both a geographic and customer level, regular credit examinations, and
quarterly management reviews of large loans and loans experiencing deterioration
of credit quality. The Company strives to identify potential problem loans
early, take any necessary charge-offs promptly, and maintain strong reserve
levels. Commercial banking operations rely on a strong credit culture that
combines prudent credit policies and individual lender accountability. In
addition, the commercial lenders generally focus on middle market companies
within their regions. In the Company's retail banking operations, a standard
credit scoring system is used to assess consumer credit risks and to price
consumer products accordingly.
In evaluating its credit risk, the Company considers changes in
underwriting activities, if any, the loan portfolio composition, including
product mix and geographic, industry or customer-specific concentrations, trends
in loan performance, assessments of a specific customer's Year 2000 readiness,
the level of allowance coverage and macroeconomic factors. Approximately 46
percent of the Company's loan portfolio consists of credit to businesses and
consumers in Minnesota, Oregon and Washington.
NET CHARGE-OFFS AND ALLOWANCE FOR CREDIT LOSSES Net loan charge-offs totaled
$139.6 million in the first quarter of 1999, compared with $103.2 million in the
first quarter of 1998. Commercial loan net charge-offs were $23.9 million in the
first quarter of 1999 and $14.1 million in the first quarter of 1998. Consumer
loan net charge-offs for the quarter were $115.7 million, compared with $89.1
million for the first quarter of 1998. The increases in net charge-offs from the
first quarter of 1998 were primarily the result of one large commercial credit,
an expected increase in losses on several consumer loan portfolios purchased in
1998 and higher consumer fraud losses. Without the losses associated with
portfolios purchased and fraud, consumer net charge-offs, excluding residential
real estate, were 2.07 percent in the first quarter of 1999 compared with 1.96
percent in the first quarter of 1998. Consumer loans 30 days or more past due
increased to 2.51 percent of the portfolio at March 31, 1999, compared with 2.39
percent at December 31, 1998. The increase was primarily due to expected
delinquencies associated with the consumer loan portfolio purchases.
8 U.S. Bancorp
TABLE 6 SUMMARY OF ALLOWANCE FOR CREDIT LOSSES
Three Months Ended
---------------------------
March 31 March 31
(Dollars in Millions) 1999 1998
- - - - - - - - - - - - - - - - - -----------------------------------------------------------------------------------
Balance at beginning of period ...................... $ 1,000.9 $ 1,008.7
CHARGE-OFFS:
Commercial:
Commercial ....................................... 43.5 27.3
Real estate:
Commercial mortgage ............................ .3 4.3
Construction ................................... .2 2.0
---------------------------
Total commercial ............................... 44.0 33.6
Consumer:
Residential mortgage ............................. 1.0 2.8
Credit card ...................................... 55.1 46.9
Other ............................................ 81.2 57.9
---------------------------
Total consumer ................................. 137.3 107.6
---------------------------
Total ......................................... 181.3 141.2
RECOVERIES:
Commercial:
Commercial ....................................... 18.4 13.1
Real estate:
Commercial mortgage ............................ 1.7 6.2
Construction ................................... -- .2
---------------------------
Total commercial ............................... 20.1 19.5
Consumer:
Residential mortgage ............................. .2 .3
Credit card ...................................... 4.8 5.7
Other ............................................ 16.6 12.5
---------------------------
Total consumer ................................. 21.6 18.5
---------------------------
Total ......................................... 41.7 38.0
NET CHARGE-OFFS:
Commercial:
Commercial ....................................... 25.1 14.2
Real estate:
Commercial mortgage ............................ (1.4) (1.9)
Construction ................................... .2 1.8
---------------------------
Total commercial ............................... 23.9 14.1
Consumer:
Residential mortgage ............................. .8 2.5
Credit card ...................................... 50.3 41.2
Other ............................................ 64.6 45.4
---------------------------
Total consumer ................................. 115.7 89.1
---------------------------
Total ......................................... 139.6 103.2
Provision charged to operating expense .............. 117.0 90.0
Additions related to acquisitions ................... 4.2 --
---------------------------
Balance at end of period ............................ $ 982.5 $ 995.5
===========================
Allowance as a percentage of:
Period-end loans .................................. 1.65% 1.81%
Nonperforming loans ............................... 324 340
Nonperforming assets .............................. 302 306
Annualized net charge-offs ....................... 174 238
===================================================================================
U.S. Bancorp 9
TABLE 7 NET CHARGE-OFFS AS A PERCENTAGE OF AVERAGE LOANS OUTSTANDING
Three Months Ended
--------------------
March 31 March 31
1999 1998
- - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------------------
COMMERCIAL:
Commercial ....................................................... .39% .25%
Real estate:
Commercial mortgage ............................................. (.07) (.09)
Construction .................................................... .02 .30
--------------------
Total commercial ................................................ .26 .17
CONSUMER:
Residential mortgage ............................................. .11 .25
Credit card ...................................................... 5.08 4.20
Other ............................................................ 1.80 1.47
--------------------
Total consumer .................................................. 2.17 1.76
--------------------
Total .......................................................... .96% .77%
==========================================================================================
NONPERFORMING ASSETS Nonperforming assets include all nonaccrual loans,
restructured loans, other real estate and other nonperforming assets owned by
the Company. At March 31, 1999, nonperforming assets totaled $325.8 million, an
increase of $21.5 million (7 percent) from December 31, 1998. The increase in
nonperforming assets from the fourth quarter of 1998 was primarily due to one
large commercial credit. The ratio of nonperforming assets to loans and other
real estate was .55 percent at March 31, 1999, compared with .51 percent at
December 31, 1998. The percentage of consumer loans 90 days or more past due of
the total consumer loan portfolio totaled .85 percent at March 31, 1999,
compared with .75 percent at December 31, 1998.
INTEREST RATE RISK MANAGEMENT The Company's policy is to maintain a low interest
rate risk position. The Company limits the exposure of net interest income
associated with interest rate movements through asset/liability management
strategies. The Company's Asset and Liability Management Committee ("ALCO") uses
three methods for measuring and managing consolidated interest rate risk: Net
Interest Income Simulation Modeling, Market Value Simulation Modeling, and
Repricing Mismatch Analysis. As part of Market
TABLE 8 NONPERFORMING ASSETS*
March 31 December 31
(Dollars In Millions) 1999 1998
- - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------------
COMMERCIAL:
Commercial ....................................................... $ 176.0 $ 165.7
Real estate:
Commercial mortgage ............................................. 33.1 35.5
Construction .................................................... 33.0 17.2
----------------------
Total commercial ................................................ 242.1 218.4
CONSUMER:
Residential mortgage ............................................. 47.5 46.6
Other ............................................................ 13.9 13.9
----------------------
Total consumer .................................................. 61.4 60.5
----------------------
Total nonperforming loans ..................................... 303.5 278.9
OTHER REAL ESTATE .................................................. 12.8 14.3
OTHER NONPERFORMING ASSETS ......................................... 9.5 11.1
----------------------
Total nonperforming assets .................................... $ 325.8 $ 304.3
======================
Accruing loans 90 days or more past due** .......................... $ 126.8 $ 106.8
Nonperforming loans to total loans ................................. .51% .47%
Nonperforming assets to total loans plus other real estate ......... .55 .51
=============================================================================================
*THROUGHOUT THIS DOCUMENT, NONPERFORMING ASSETS AND RELATED RATIOS DO NOT
INCLUDE LOANS MORE THAN 90 DAYS PAST DUE AND STILL ACCRUING.
**THESE LOANS ARE NOT INCLUDED IN NONPERFORMING ASSETS AND CONTINUE TO ACCRUE
INTEREST BECAUSE THEY ARE SECURED BY COLLATERAL AND/OR ARE IN THE PROCESS OF
COLLECTION AND ARE REASONABLY EXPECTED TO RESULT IN REPAYMENT OR RESTORATION
TO CURRENT STATUS.
10 U.S. Bancorp
TABLE 9 DELINQUENT LOAN RATIOS*
March 31 December 31
90 days or more past due 1999 1998
- - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------------
COMMERCIAL:
Commercial ....................................................... .69% .65%
Real estate:
Commercial mortgage ............................................. .40 .44
Construction .................................................... .95 .56
----------------------
Total commercial ................................................ .65 .60
CONSUMER:
Residential mortgage ............................................. 2.09 1.86
Credit card ...................................................... .91 .74
Other ............................................................ .58 .51
----------------------
Total consumer .................................................. .85 .75
----------------------
Total .......................................................... .72% .65%
=============================================================================================
*RATIOS INCLUDE NONPERFORMING LOANS AND ARE EXPRESSED AS A PERCENT OF ENDING
LOAN BALANCES.
Value Simulation Modeling, ALCO uses a value-at-risk ("VaR") model to measure
and manage market risk in its broker/dealer activities.
NET INTEREST INCOME SIMULATION MODELING: The Company uses a net interest income
simulation model to estimate near-term (next 24 months) risk due to changes in
interest rates. The model, which is updated monthly, incorporates substantially
all the Company's assets and liabilities and off-balance sheet instruments,
together with forecasted changes in the balance sheet and assumptions that
reflect the current interest rate environment. Balance sheet changes are based
on expected prepayments of loans and securities and forecasted loan and deposit
growth. ALCO uses the model to simulate the effect of immediate and sustained
parallel shifts in the yield curve of 1 percent, 2 percent and 3 percent as well
as the effect of immediate and sustained flattening or steepening of the yield
curve. ALCO also calculates the sensitivity of the simulation results to changes
in key assumptions, such as the Prime/LIBOR spread or core deposit repricing.
The results from the simulation are reviewed by ALCO monthly and are used to
guide ALCO's hedging strategies. ALCO guidelines, approved by the Company's
Board of Directors, limit the estimated change in net interest income over the
succeeding 12 months to 1.5 percent of forecasted net interest income given a 1
percent change in interest rates. At March 31, 1999, forecasted net interest
income for the next 12 months would decrease $.2 million from an immediate 100
basis point upward parallel shift in rates and increase $2.1 million from a
downward shift of similar magnitude.
MARKET VALUE SIMULATION MODELING: The net interest income simulation model is
somewhat limited by its dependence upon accurate forecasts of future business
activity and the resulting effect on balance sheet assets and liabilities. As a
result, its usefulness is greatly diminished for periods beyond one or two
years. To better measure all interest rate risk, both short-term and long-term,
the Company uses a market value simulation model. This model estimates the
effect of 1 percent, 2 percent and 3 percent rate shocks on the present value of
all future cash flows of the Company's outstanding assets, liabilities and
off-balance sheet instruments. The amount of market value risk is subject to
limits, approved by the Company's Board of Directors, of .5 percent of assets
for an immediate 100 basis point rate shock. Historically, the Company's market
value risk position has been substantially lower than its limits.
The VaR model used to measure and manage market risk in the broker/dealer
business uses an estimate of volatility appropriate to each instrument and a
three standard deviation move in the underlying markets. The Company believes
the market risk inherent in its broker/dealer activities, including fixed
income, equities and foreign exchange, is immaterial.
REPRICING MISMATCH ANALYSIS: A traditional gap analysis provides a point-in-time
measurement of the relationship between the amounts of interest rate sensitive
assets and liabilities repricing in a given time period. While the analysis
provides a useful snapshot of interest rate risk, it does not capture all
aspects of interest rate risk. As a result, ALCO uses the repricing mismatch
analysis primarily for managing intermediate-term interest rate risk and has
established limits, approved by the Company's Board of Directors, for gap
positions in the two- to three-year time period of 5 percent of assets.
USE OF DERIVATIVES TO MANAGE INTEREST RATE RISK: While each of the interest rate
risk measurements has limitations, taken together they represent a comprehensive
view of the magnitude of the Company's interest rate risk over various
U.S. Bancorp 11
TABLE 10 INTEREST RATE SWAP HEDGING PORTFOLIO NOTIONAL BALANCES AND YIELDS BY
MATURITY DATE
At March 31, 1999 (Dollars in Millions)
- - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------------------------
Weighted Weighted
Average Average
Receive Fixed Swaps* Notional Interest Rate Interest Rate
Maturity Date Amount Received Paid
- - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------------------------
1999 (remaining nine months) ........................ $ 1,617 6.10% 4.94%
2000 ................................................ 815 6.23 4.95
2001 ................................................ 857 5.90 4.94
2002 ................................................ 845 5.82 4.94
2003 ................................................ 695 5.85 4.96
After 2003 .......................................... 2,455 6.36 4.95
---------
Total ............................................... $ 7,284 6.12% 4.94%
=================================================================================================
*AT MARCH 31, 1999, THE COMPANY HAD NO SWAPS IN ITS HEDGING PORTFOLIO THAT
REQUIRED IT TO PAY FIXED-RATE INTEREST.
time intervals. The Company manages its interest rate risk by entering into
off-balance sheet transactions (primarily interest rate swaps), investing in
fixed rate assets or issuing variable rate liabilities. To a lesser degree, the
Company also uses interest rate caps and floors to hedge this risk.
In the first quarter of 1999, the Company added $675 million of interest
rate swaps to reduce its interest rate risk. This increase was largely offset by
$625 million of interest rate swap maturities. Interest rate swap agreements
involve the exchange of fixed and floating rate payments without the exchange of
the underlying notional amount on which the interest payments are calculated. As
of March 31, 1999, the Company received payments on $7.3 billion notional amount
of interest rate swap agreements based on fixed interest rates, and made
payments based on variable interest rates. These swaps had a weighted average
fixed rate received of 6.12 percent and a weighted average variable rate paid of
4.94 percent. The remaining maturity of these agreements ranges from one month
to 15 years with an average remaining maturity of 3.9 years. Swaps increased net
interest income for the quarters ended March 31, 1999, and 1998 by $17.4 million
and $7.6 million, respectively.
The Company also purchases interest rate caps and floors to minimize the
impact of fluctuating interest rates on earnings. To hedge against rising
interest rates, the Company uses interest rate caps. Counterparties to these
interest rate cap agreements pay the Company when specified rates rise above a
specified point or strike level. The payment is based on the notional amount and
the difference between current rates and strike rates. There were no caps
outstanding at March 31, 1999. To hedge against falling interest rates, the
Company uses interest rate floors. Counterparties to interest rate floor
agreements pay the Company when specified rates fall below the strike level.
Like caps, the payment is based on the notional amount and the difference in
current rates and strike rates. The total notional amount of floor agreements
purchased as of March 31, 1999, all of which were LIBOR-indexed, was $500
million. The impact of floors on net interest income was not material for the
quarters ended March 31, 1999, and 1998.
YEAR 2000 RISK MANAGEMENT The Company is continuing efforts to address the "Year
2000" computer problem, which arose because many computer applications worldwide
will not properly recognize the date change from December 31, 1999, to January
1, 2000, potentially causing production of erroneous data, miscalculations,
system failures and other operational problems. In the early 1990s, the Company
implemented significant technology changes and replaced many of its principal
data processing applications with licensed software packages. The Company also
undertook an organization-wide initiative to address the Year 2000 issue,
including the formation in 1996 of a dedicated project team of employees to
evaluate the Year 2000 impact on the Company's critical computer hardware and
software and embedded technologies in its physical plant and automated equipment
(such as ATMs, check sorting machines, vaults and security systems), and on its
customers. In addition to evaluating the scope of the Year 2000 issue, the
project team prioritized tasks, developed implementation plans and established
completion and testing schedules. As a result, the Company has replaced,
modified or reprogrammed certain systems, is requiring that new purchased
hardware and software be Year 2000 ready, and is testing systems in an isolated
environment dedicated to Year 2000 testing. Apart from the Company's project,
federal banking regulators are conducting special examinations of FDIC-insured
banks and savings associations to determine whether they are taking necessary
steps to prepare for the Year 2000 issue, and are closely monitoring the
progress made by these institutions in completing key steps required by their
individual Year 2000 plans.
12 U.S. Bancorp
Evaluation, replacement, renovation, installation and testing of the
Company's critical internal computer hardware and software (including software
to be remediated by vendors) and embedded technologies have been substantially
completed, in accordance with bank regulatory guidelines, allowing time for
necessary refinements and additional testing before December 31, 1999. On April
1, 1999, the Company announced that it had successfully completed a testing
phase validating the readiness of its critical internal systems. In addition,
the remediation and testing of non-critical systems continues to progress and is
expected to be completed during 1999.
Ultimately, the potential impact of the Year 2000 issue will depend not
only on the success of the corrective measures the Company undertakes, but also
on the way in which the Year 2000 issue is addressed by customers, vendors,
service providers, counterparties, clearing houses, utilities (e.g., power,
telecommunication, transportation), governmental agencies (including the Federal
Reserve, which provides services for processing and settling payments and
securities transactions between banks) and other entities with which the Company
does business. The Company is communicating with these parties to monitor their
efforts in addressing the Year 2000 issue and to evaluate any likely impact on
the Company. For example, the Company is conducting ongoing Year 2000 surveys
and evaluations of its corporate and middle-market borrowing customers and of
other significant funds takers, funds providers and capital market/asset
management counterparties, and has implemented in its lending units uniform
criteria for identifying, managing and underwriting Year 2000 credit risk. The
Company continues to review its fiduciary activities for Year 2000 risk related
to marketable securities, special assets and counterparties. The Company is
scheduling testing with critical service providers as necessary and expects such
testing to be completed by June 30, 1999. A prioritized schedule for external
testing during 1999 with certain large customers also has been established and
such testing is underway. In addition, the Company is participating in tests
organized by major industry and governmental organizations as they are scheduled
throughout 1999, including tests sponsored by the Federal Reserve, the National
Automated Clearing House Association and the Securities and Exchange Commission.
Based on the Company's Year 2000 efforts, management presently believes
that the Year 2000 issue will not result in significant operational problems for
the Company. In addition, the Company's Year 2000 project has contingency plans
designed to mitigate the potential effects of system failures in the event of
reasonably likely worst case scenarios. These contingency plans, which are
expected to be substantially completed by June 30, 1999, in accordance with bank
regulatory guidelines, include back-up solutions for mission-critical operations
and business continuation plans for significant vendors and other business
partners. For example, the Company has arranged for reserve power supplies for
certain vital locations, and will have available back-up account data and
alternative manual processes for certain business line functions. The Company
also has developed a liquidity management plan to address potential increased
funding needs that may arise as the millennium approaches. Notwithstanding the
Company's efforts and such contingency plans, however, given the unprecedented
nature of the Year 2000 computer problem, there can be no assurance that Year
2000 issues will not arise, or that any such issues will be fully mitigated.
Further, the Year 2000 efforts of third parties are not within the Company's
control, and their failure to remediate Year 2000 issues successfully could
result in, among other things, business disruption, operational problems,
financial loss, increased credit risk and legal liability for the Company.
The discussions regarding Year 2000 in this Form 10-Q, including the
discussions of the timing and effectiveness of implementation and cost of the
Company's Year 2000 project, contain forward-looking statements, which are based
on management's best estimates derived using various assumptions. These
forward-looking statements involve inherent risks and uncertainties, and actual
results could differ materially from those contemplated by such statements.
Factors that might cause material differences include, but are not limited to,
the failure of third parties with which the Company does business to remedy
their own Year 2000 issues and the Company's ability to respond to unforeseen
Year 2000 complications. Such material differences could result in business
disruption, operational problems, financial loss, legal liability and similar
adverse effects on the Company, which effects could be material.
U.S. Bancorp 13
TABLE 11 CAPITAL RATIOS
March 31 December 31
(Dollars in Millions) 1999 1998
- - - - - - - - - - - - - - - - - -----------------------------------------------------------------------------------------------
Tangible common equity* ............................................ $ 4,684 $ 4,465
As a percent of assets ........................................... 6.3% 6.0%
Tier 1 capital ..................................................... $ 5,148 $ 4,917
As a percent of risk-adjusted assets ............................. 6.6% 6.4%
Total risk-based capital ........................................... $ 8,696 $ 8,343
As a percent of risk-adjusted assets ............................. 11.2% 10.9%
Leverage ratio ..................................................... 7.0 6.8
===============================================================================================
*DEFINED AS COMMON EQUITY LESS GOODWILL.
CAPITAL MANAGEMENT At March 31, 1999, total tangible common equity was $4.7
billion, or 6.3 percent of assets, compared with 6.0 percent at December 31,
1998. Tier 1 and total risk-based capital ratios were 6.6 percent and 11.2
percent at March 31, 1999, compared with 6.4 percent and 10.9 percent at
December 31, 1998. The March 31, 1999, leverage ratio was 7.0 percent compared
with 6.8 percent at December 31, 1998.
On June 8, 1998, the Company's Board of Directors authorized the
repurchase of up to $2.5 billion of the Company's common stock over the period
ending March 31, 2000. The shares will be repurchased in the open market or
through negotiated transactions. Under this program, the Company repurchased
26.0 million shares for $1.0 billion, including 1.4 million shares for $47.0
million in the first quarter of 1999.
ACCOUNTING CHANGES
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES Statement of
Financial Accounting Standards No. ("SFAS") 133, "Accounting for Derivative
Instruments and Hedging Activities," establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. In
certain defined conditions, a derivative may be specifically designated as a
hedge for a particular exposure. The accounting for changes in the fair value of
the derivative depends on the intended use of the derivative and the resulting
designation. SFAS 133 is effective for all quarters of fiscal years beginning
after June 15, 1999, with earlier application permitted. Retroactive application
of this Statement to prior periods is prohibited. The adoption of SFAS 133 is
not expected to have a material impact on the Company.
14 U.S. Bancorp
CONSOLIDATED BALANCE SHEET
March 31 December 31
(Dollars in Millions) 1999 1998
- - - - - - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
Cash and due from banks .................................................................... $ 4,020 $ 4,772
Federal funds sold ......................................................................... 128 83
Securities purchased under agreements to resell ............................................ 446 461
Trading account securities ................................................................. 686 537
Available-for-sale securities .............................................................. 5,253 5,577
Loans ...................................................................................... 59,619 59,122
Less allowance for credit losses ......................................................... 983 1,001
------------------------
Net loans ................................................................................ 58,636 58,121
Premises and equipment ..................................................................... 876 879
Interest receivable ........................................................................ 445 456
Customers' liability on acceptances ........................................................ 139 166
Goodwill and other intangible assets ....................................................... 1,965 1,975
Other assets ............................................................................... 3,516 3,411
------------------------
Total assets ............................................................................ $ 76,110 $ 76,438
========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing ...................................................................... $ 14,194 $ 16,377
Interest-bearing ......................................................................... 34,478 33,657
------------------------
Total deposits .......................................................................... 48,672 50,034
Federal funds purchased .................................................................... 1,788 1,255
Securities sold under agreements to repurchase ............................................. 1,261 1,427
Other short-term funds borrowed ............................................................ 1,120 683
Long-term debt ............................................................................. 13,774 13,781
Company-obligated mandatorily redeemable preferred securities of subsidiary trusts
holding solely the junior subordinated debentures of the parent company .................. 950 950
Acceptances outstanding .................................................................... 139 166
Other liabilities .......................................................................... 2,229 2,172
------------------------
Total liabilities ....................................................................... 69,933 70,468
Shareholders' equity:
Common stock, par value $1.25 a share - authorized 1,500,000,000 shares;
issued: 3/31/99 and 12/31/98 - 744,797,857 shares ....................................... 931 931
Capital surplus .......................................................................... 1,213 1,247
Retained earnings ........................................................................ 4,681 4,456
Accumulated other comprehensive income ................................................... 54 72
Less cost of common stock in treasury: 3/31/99 - 18,428,964 shares; 12/31/98 -
19,036,139 shares ....................................................................... (702) (736)
------------------------
Total shareholders' equity .............................................................. 6,177 5,970
------------------------
Total liabilities and shareholders' equity .............................................. $ 76,110 $ 76,438
=======================================================================================================================
U.S. Bancorp 15
CONSOLIDATED STATEMENT OF INCOME
Three Months Ended
-------------------------
(Dollars in Millions, Except Per Share Data) March 31 March 31
(Unaudited) 1999 1998
- - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans ................................................................................. $ 1,238.5 $ 1,204.2
Securities:
Taxable ............................................................................. 64.6 85.8
Exempt from federal income taxes .................................................... 14.7 16.1
Other interest income ................................................................. 34.2 19.0
-------------------------
Total interest income ............................................................ 1,352.0 1,325.1
INTEREST EXPENSE
Deposits .............................................................................. 311.6 355.1
Federal funds purchased and repurchase agreements ..................................... 39.4 33.6
Other short-term funds borrowed ....................................................... 12.9 12.8
Long-term debt ........................................................................ 186.1 156.4
Company-obligated mandatorily redeemable preferred securities of subsidiary trusts
holding solely the junior subordinated debentures of the parent company ............. 19.3 12.3
-------------------------
Total interest expense ........................................................... 569.3 570.2
-------------------------
Net interest income ................................................................... 782.7 754.9
Provision for credit losses ........................................................... 117.0 90.0
-------------------------
Net interest income after provision for credit losses ................................. 665.7 664.9
NONINTEREST INCOME
Credit card fee revenue ............................................................... 126.8 126.8
Trust and investment management fees .................................................. 117.2 94.9
Service charges on deposit accounts ................................................... 103.4 97.9
Investment products fees and commissions .............................................. 88.6 18.2
Trading account profits and commissions ............................................... 51.5 7.1
Investment banking revenue ............................................................ 36.2 --
Securities gains ...................................................................... -- 12.6
Other ................................................................................. 102.6 101.0
-------------------------
Total noninterest income ......................................................... 626.3 458.5
NONINTEREST EXPENSE
Salaries .............................................................................. 354.1 239.6
Employee benefits ..................................................................... 70.0 54.1
Net occupancy ......................................................................... 50.0 43.5
Furniture and equipment ............................................................... 38.1 35.4
Goodwill and other intangible assets .................................................. 37.8 33.4
Merger-related ........................................................................ 2.9 46.5
Other ................................................................................. 165.9 153.1
-------------------------
Total noninterest expense ........................................................ 718.8 605.6
-------------------------
Income before income taxes ............................................................ 573.2 517.8
Applicable income taxes ............................................................... 206.4 189.3
-------------------------
Net income ............................................................................ $ 366.8 $ 328.5
=========================
Earnings per share .................................................................... $ .51 $ .44
Diluted earnings per share ............................................................ $ .50 $ .44
===================================================================================================================
16 U.S. Bancorp
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Accumulated
Other
(Dollars in Millions) Common Shares Common Capital Retained Comprehensive Treasury
(Unaudited) Outstanding* Stock Surplus Earnings Income Stock** Total
- - - - - - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1997 ...................... 739,933,014 $ 924.9 $1,261.1 $3,644.8 $ 59.3 $ -- $5,890.1
Common dividends declared ...................... (129.8) (129.8)
Purchase of treasury stock ..................... (33,411) (1.2) (1.2)
Issuance of common stock:
Dividend reinvestment ........................ 91,116 .1 3.4 3.5
Stock option and stock
purchase plans .............................. 2,465,340 3.1 29.5 1.2 33.8
----------------------------------------------------------------------------------
742,456,059 928.1 1,294.0 3,515.0 59.3 -- 5,796.4
Comprehensive income
Net income ..................................... 328.5 328.5
Other comprehensive income:
Unrealized gain on securities of $9.0 (net of
$5.1 tax expense) net of reclassification
adjustment for gains included in net income
of $11.1 (net of $6.4 tax expense) .......... (2.1) (2.1)
--------
Total comprehensive income ................ 326.4
----------------------------------------------------------------------------------
BALANCE MARCH 31, 1998 ......................... 742,456,059 $ 928.1 $1,294.0 $3,843.5 $ 57.2 $ -- $6,122.8
===================================================================================================================================
BALANCE DECEMBER 31, 1998 ...................... 725,761,718 $ 931.0 $1,247.2 $4,455.8 $ 71.8 $ (735.8) $5,970.0
Common dividends declared ...................... (141.7) (141.7)
Purchase of treasury stock ..................... (1,397,940) (47.0) (47.0)
Issuance of common stock:
Acquisitions ................................. 1,027,276 (3.6) 40.0 36.4
Dividend reinvestment ........................ 168,650 (.4) 6.4 6.0
Stock option and stock
purchase plans .............................. 809,189 (30.2) 34.5 4.3
----------------------------------------------------------------------------------
726,368,893 931.0 1,213.0 4,314.1 71.8 (701.9) 5,828.0
Comprehensive income
Net income ..................................... 366.8 366.8
Other comprehensive income:
Unrealized gain on securities of $29.2 (net of
$11.1 tax expense) .......................... (18.1) (18.1)
--------
Total comprehensive income ................ 348.7
----------------------------------------------------------------------------------
BALANCE MARCH 31, 1999 ......................... 726,368,893 $ 931.0 $1,213.0 $4,680.9 $ 53.7 $ (701.9) $6,176.7
===================================================================================================================================
*DEFINED AS TOTAL COMMON SHARES LESS COMMON STOCK HELD IN TREASURY.
**ENDING TREASURY SHARES WERE 18,428,964 AT MARCH 31, 1999 AND 19,036,139 AT
DECEMBER 31, 1998.
U.S. Bancorp 17
CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended
------------------------
(Dollars in Millions) March 31 March 31
(Unaudited) 1999 1998
- - - - - - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net cash provided by operating activities .................................... $ 611.6 $ 521.0
------------------------
INVESTING ACTIVITIES
Net cash (used) provided by:
Loans outstanding ............................................................ (512.6) (249.7)
Securities purchased under agreements to resell .............................. 14.6 181.9
Available-for-sale securities:
Sales ........................................................................ 53.2 166.6
Maturities ................................................................... 455.1 352.1
Purchases .................................................................... (217.4) (37.0)
Proceeds from sales of other real estate ....................................... 7.8 13.8
Net purchases of bank premises and equipment ................................... (30.1) (34.0)
Purchases of loans ............................................................. (127.7) --
Acquisitions, net of cash received ............................................. (21.8) --
Cash and cash equivalents of acquired subsidiaries ............................. 3.6 --
Other - net .................................................................... (192.5) (145.8)
------------------------
Net cash (used) provided by investing activities ............................. (567.8) 247.9
------------------------
FINANCING ACTIVITIES
Net cash (used) provided by:
Deposits ..................................................................... (1,362.7) (469.1)
Federal funds purchased and securities sold under agreements to repurchase ... 367.2 (255.4)
Short-term borrowings ........................................................ 429.5 (33.8)
Proceeds from long-term debt ................................................... 300.0 687.3
Principal payments on long-term debt ........................................... (307.2) (522.6)
Proceeds from dividend reinvestment, stock option and stock purchase plans ..... 10.3 37.3
Repurchase of common stock ..................................................... (47.0) (1.2)
Cash dividends ................................................................. (141.7) (129.8)
------------------------
Net cash used by financing activities ........................................ (751.6) (687.3)
------------------------
Change in cash and cash equivalents .......................................... (707.8) 81.6
Cash and cash equivalents at beginning of period ............................... 4,855.3 4,801.0
------------------------
Cash and cash equivalents at end of period .................................... $4,147.5 $4,882.6
===========================================================================================================
18 U.S. Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q and, therefore, do not include all
information and footnotes necessary for a complete presentation of financial
position, results of operations and cash flow activity required under generally
accepted accounting principles. In the opinion of management of the Company, all
adjustments (consisting only of normal recurring accruals) necessary for a fair
presentation of results have been made and the Company believes such
presentation is adequate to make the information presented not misleading. For
further information, refer to the consolidated financial statements and
footnotes included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998. Certain amounts in prior periods have been reclassified
to conform to the current presentation.
Accounting policies for the lines of business are the same as those used
in preparation of the consolidated financial statements with respect to
activities specifically attributable to each business line. However, the
preparation of business line results requires management to establish
methodologies to allocate funding costs and benefits, expenses and other
financial elements to each line of business. Table 2 "Line of Business Financial
Performance" on pages 3 through 5 provides details of segment results. This
information is incorporated by reference into these Notes to Consolidated
Financial Statements.
NOTE B ACCOUNTING CHANGES
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities," establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. In certain defined conditions, a derivative may be specifically
designated as a hedge for a particular exposure. The accounting for changes in
the fair value of the derivative depends on the intended use of the derivative
and the resulting designation. SFAS 133 is effective for all quarters of fiscal
years beginning after June 15, 1999, with earlier application permitted.
Retroactive application of this Statement to prior periods is prohibited. The
adoption of SFAS 133 is not expected to have a material impact on the Company.
NOTE C BUSINESS COMBINATIONS AND DIVESTITURES
BANK OF COMMERCE On February 18, 1999, the Company announced an agreement to
acquire the San Diego-based Bank of Commerce, one of the largest U.S. Small
Business Administration ("SBA") lenders. With $638 million in assets at year-end
1998 and SBA loan originations in excess of $240 million on an annual basis,
Bank of Commerce operates 10 full-service branches and 23 SBA loan production
offices. The acquisition is pending regulatory approval and is expected to close
at the end of the second quarter of 1999.
OTHER ACQUISITIONS On March 16, 1999, the Company completed its acquisition of
Reliance Trust Company's corporate trust business which operates offices in
Georgia, Florida, and Tennessee. On January 4, 1999, the Company completed its
acquisition of Libra Investments, Inc., a privately held Los Angeles and New
York based investment bank that specializes in underwriting and trading high
yield and mezzanine securities for middle market companies. Effective December
15, 1998, the Company completed its acquisition of Northwest Bancshares, Inc., a
privately held bank holding company headquartered in Vancouver, Washington, with
10 banking locations and $344 million in deposits. In May 1998, the Company
completed its acquisition of Piper Jaffray, a full-service investment banking
and securities brokerage firm. These transactions were accounted for as purchase
acquisitions.
U.S. Bancorp 19
NOTE D SECURITIES
The detail of the amortized cost and fair value of available-for-sale securities
consisted of the following:
March 31, 1999 December 31, 1998
--------------------- ---------------------
Amortized Fair Amortized Fair
(Dollars in Millions) Cost Value Cost Value
- - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------------------------
U.S. Treasury .................................. $ 456 $ 461 $ 489 $ 500
Mortgage-backed ................................ 3,224 3,253 3,395 3,438
Other U.S. agencies ............................ 236 241 252 259
State and political ............................ 1,163 1,198 1,219 1,255
Other .......................................... 87 100 106 125
--------------------- ---------------------
Total ......................................... $ 5,166 $ 5,253 $ 5,461 $ 5,577
================================================================================================
NOTE E LOANS
The composition of the loan portfolio was as follows:
March 31 December 31
(Dollars in Millions) 1999 1998
- - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------------------------
COMMERCIAL:
Commercial ......................................................... $26,372 $25,974
Real estate:
Commercial mortgage ............................................... 8,367 8,193
Construction ...................................................... 3,458 3,069
-----------------------
Total commercial ................................................ 38,197 37,236
-----------------------
CONSUMER:
Home equity and second mortgage .................................... 7,604 7,409
Credit card ........................................................ 3,978 4,221
Automobile ......................................................... 3,340 3,413
Revolving credit ................................................... 1,675 1,686
Installment ........................................................ 1,105 1,168
Student* ........................................................... 843 829
-----------------------
Subtotal .......................................................... 18,545 18,726
Residential mortgage ............................................... 2,855 3,124
Residential mortgage held for sale ................................. 22 36
-----------------------
Total consumer .................................................. 21,422 21,886
-----------------------
Total loans ................................................... $59,619 $59,122
================================================================================================
*ALL OR PART OF THE STUDENT LOAN PORTFOLIO MAY BE SOLD WHEN THE REPAYMENT
PERIOD BEGINS.
At March 31, 1999, the Company had $242 million in loans considered
impaired under SFAS 114 included in its nonaccrual loans. The carrying value of
the impaired loans was less than or equal to the appraised collateral value or
the present value of expected future cash flows and, accordingly, no allowance
for credit losses was specifically allocated to impaired loans. For the quarter
ended March 31, 1999, the average recorded investment in impaired loans was
approximately $230 million. No interest income was recognized on impaired loans
during the quarter.
20 U.S. Bancorp
NOTE F LONG-TERM DEBT
Long-term debt (debt with original maturities of more than one year) consisted
of the following:
March 31 December 31
(Dollars in Millions) 1999 1998
- - - - - - - - - - - - - - - - - ----------------------------------------------------------------------------------------------------------
Fixed-rate subordinated notes (5.70 to 8.35%) -- maturities to June 2026 ........ $ 2,850 $ 2,850
Step-up subordinated notes -- due August 15, 2005 ............................... 100 100
Floating-rate notes -- due November 15, 1999 .................................... 200 200
Floating-rate notes -- due February 27, 2000 .................................... 250 250
Floating-rate subordinated notes -- due November 30, 2010 ....................... 107 107
Federal Home Loan Bank advances (4.83% to 9.11%) -- maturities to October 2026 .. 2,159 2,187
Medium-term notes (4.81% to 6.93%) -- maturities to July 2002 ................... 1,626 1,675
Bank notes (4.79% to 6.38%) -- maturities to November 2005 ...................... 6,284 6,209
Other ........................................................................... 198 203
-----------------------
Total .......................................................................... $13,774 $13,781
==========================================================================================================
NOTE G SHAREHOLDERS' EQUITY
On January 4, 1999, in conjunction with an acquisition, the Company issued
1,027,276 shares of common stock with an aggregate value of $36.4 million.
On June 8, 1998, the Company's Board of Directors authorized the repurchase
of up to $2.5 billion of the Company's common stock over the period ending March
31, 2000. The shares will be repurchased in the open market or through
negotiated transactions. Under this program, the Company repurchased 26.0
million shares for $1.0 billion, including 1.4 million shares for $47.0 million
in the first quarter of 1999.
NOTE H EARNINGS PER SHARE
The components of earnings per share were:
Three Months Ended March 31
---------------------------
(Dollars in Millions, Except Per Share Data) 1999 1998
- - - - - - - - - - - - - - - - - ----------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE:
Net income to common stockholders ........................................... $ 366.8 $ 328.5
===========================
Average shares outstanding .................................................. 722,637,379 738,708,228
===========================
Earnings per share .......................................................... $ .51 $ .44
===========================
DILUTED EARNINGS PER SHARE:
Net income to common stockholders ........................................... $ 366.8 $ 328.5
===========================
Average shares outstanding .................................................. 722,637,379 738,708,228
Net effect of the assumed purchase of stock under the stock option and
stock purchase plans - based on the treasury stock method using
average market price ....................................................... 5,664,720 10,927,311
---------------------------
Dilutive common shares outstanding .......................................... 728,302,099 749,635,539
===========================
Diluted earnings per share .................................................. $ .50 $ .44
==========================================================================================================
U.S. Bancorp 21
NOTE I INCOME TAXES
The components of income tax expense were:
Three Months Ended
--------------------
March 31 March 31
(Dollars in Millions) 1999 1998
- - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------------------------
FEDERAL:
Current tax .............................................................. $154.2 $167.1
Deferred tax provision (credit) .......................................... 17.9 (3.5)
--------------------
Federal income tax ..................................................... 172.1 163.6
STATE:
Current tax .............................................................. 30.6 20.0
Deferred tax provision ................................................... 3.7 5.7
--------------------
State income tax ....................................................... 34.3 25.7
--------------------
Total income tax provision ............................................. $206.4 $189.3
=================================================================================================
The reconciliation between income tax expense and the amount computed by
applying the statutory federal income tax rate was as follows:
Three Months Ended
--------------------
March 31 March 31
(Dollars in Millions) 1999 1998
- - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------------------------
Tax at statutory rate (35%) .............................................. $200.6 $181.2
State income tax, at statutory rates, net of federal tax benefit ......... 22.3 16.7
Tax effect of:
Tax-exempt interest:
Loans ................................................................. (2.3) (2.9)
Securities ............................................................ (5.7) (5.7)
Amortization of nondeductible goodwill ................................. 9.6 6.7
Tax credits and other items ............................................ (18.1) (6.7)
--------------------
Applicable income taxes .................................................. $206.4 $189.3
=================================================================================================
The Company's net deferred tax asset was $140.6 million at March 31, 1999,
and $261.3 million at December 31, 1998.
NOTE J MERGER AND INTEGRATION CHARGES
During the first quarter of 1999, the Company recorded merger and integration
charges of $2.9 million related to conversion expenses for Piper Jaffray and
several other small acquisitions. Conversion expenses are recorded as incurred
and are associated with the conversion of customer accounts and similar expenses
relating to the conversions and integration of acquired branches and operations.
The following table presents a summary of activity with respect to the Company's
merger and integration accrual:
Three Months Ended
(Dollars in Millions) March 31, 1999
- - - - - - - - - - - - - - - - - ----------------------------------------------------------------------
Balance at December 31, 1998 .............................. $126.7
Provision charged to operating expense .................... 2.9
Cash outlays .............................................. (18.8)
Additions related to purchase acquisitions ................ 2.4
Noncash writedowns ........................................ (1.2)
--------
Balance at March 31, 1999 ................................. $112.0
======================================================================
The components of the merger and integration accrual were as follows:
(Dollars in Millions) March 31, 1999 December 31, 1998
- - - - - - - - - - - - - - - - - --------------------------------------------------------------------------------------
Severance ............................................ $ 84.2 $ 98.1
Other employee related costs ......................... 6.5 7.2
Lease terminations and
facility costs ...................................... 9.6 7.4
Contracts and system writeoffs ....................... 10.2 10.4
Other ................................................ 1.5 3.6
-----------------------------
Total ................................................ $112.0 $126.7
======================================================================================
Approximately $17 million, pretax, in additional merger-related charges
are expected to be incurred with respect to Piper Jaffray in 1999.
22 U.S. Bancorp
NOTE K COMMITMENTS, CONTINGENT LIABILITIES AND OFF-BALANCE SHEET FINANCIAL
INSTRUMENTS
In the normal course of business, the Company uses various off-balance sheet
financial instruments to meet the needs of its customers and to manage its
interest rate risk. These instruments carry varying degrees of credit, interest
rate or liquidity risk. The contract or notional amounts of these financial
instruments were as follows:
March 31 December 31
(Dollars in Millions) 1999 1998
- - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------
Commitments to extend credit:
Commercial ..................................................................... $25,499 $25,023
Corporate and purchasing cards ................................................. 16,100 24,758
Consumer credit cards .......................................................... 15,153 14,982
Other consumer ................................................................. 6,131 7,020
Letters of credit:
Standby ........................................................................ 3,149 3,241
Commercial ..................................................................... 290 309
Interest rate swap contracts:
Hedges ......................................................................... 7,284 7,239
Intermediated .................................................................. 703 740
Options contracts:
Hedge interest rate floors purchased ........................................... 500 500
Intermediated interest rate and foreign exchange caps and floors purchased ..... 399 360
Intermediated interest rate and foreign exchange caps and floors written ....... 399 360
Futures and forward contracts .................................................... 14 10
Mortgages sold with recourse ..................................................... 50 52
Foreign currency commitments:
Commitments to purchase ........................................................ 980 812
Commitments to sell ............................................................ 978 806
Commitments from securities lending .............................................. 461 342
============================================================================================================
The Company received fixed-rate interest and paid floating-rate interest on
all swap hedges as of March 31, 1999. Activity for the three months ended March
31, 1999, with respect to interest rate swaps which the Company uses to hedge
loans, deposits and long-term debt was as follows:
(Dollars in Millions)
- - - - - - - - - - - - - - - - - --------------------------------------------------------------------------------------------------------
Notional amount outstanding at December 31, 1998 ........................................... $ 7,239
Additions .................................................................................. 675
Maturities ................................................................................. (625)
Terminations ............................................................................... (5)
---------
Notional amount outstanding at March 31, 1999 ........................................... $ 7,284
========================================================================================================
Weighted average interest rate paid ........................................................ 4.94%
Weighted average interest rate received .................................................... 6.12
========================================================================================================
LIBOR-based interest rate floors totaling $500 million with an average
remaining maturity of 2.5 years at March 31, 1999, and $500 million with an
average remaining maturity of 2.7 years at December 31, 1998, hedged
floating-rate commercial loans. The strike rate on these LIBOR-based floors was
4.63 percent at March 31, 1999, and December 31, 1998.
Net unamortized deferred gains relating to swaps, options and futures were
immaterial at March 31, 1999.
U.S. Bancorp 23
NOTE L SUPPLEMENTAL DISCLOSURES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET Time certificates of deposit in denominations of
$100,000 or more totaled $3,964 million and $2,823 million at March 31, 1999,
and December 31, 1998, respectively.
CONSOLIDATED STATEMENT OF CASH FLOWS Listed below are supplemental disclosures
to the Consolidated Statement of Cash Flows.
Three Months Ended
--------------------
March 31 March 31
(Dollars in Millions) 1999 1998
- - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------
Income taxes paid (recovered) ............................................................. $ 13.5 $ 52.4)
Interest paid ............................................................................. 546.1 540.1
Net noncash transfers to foreclosed property .............................................. 5.3 5.6
Change in unrealized gain (loss) on available-for-sale securities, net of taxes of $11.1
in 1999 and $1.3 in 1998 ................................................................. (18.1) (2.1)
====================
Cash acquisitions of businesses:
Fair value of noncash assets acquired ................................................... $ 21.8 $ --
Liabilities assumed ..................................................................... -- --
--------------------
Net .................................................................................... $ 21.8 $ --
====================
Stock acquisitions of businesses:
Fair value of noncash assets acquired ................................................... $ 42.3 $ --
Net cash acquired ....................................................................... 3.6 --
Liabilities assumed ..................................................................... (9.5) --
--------------------
Net value of common stock issued ....................................................... $ 36.4 $ --
==================================================================================================================
24 U.S. Bancorp
CONSOLIDATED DAILY AVERAGE BALANCE SHEET AND RELATED YIELDS AND RATES
For the Three Months Ended March 31
1999 1998
--------------------------------------------------------------- --------
Yields Yields % Change
(Dollars In Millions) and and Average
(Unaudited) Balance Interest Rates Balance Interest Rates Balance
- - - - - - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Available-for-sale securities:
U.S. Treasury ....................................... $ 482 $ 6.8 5.72% $ 632 $ 9.2 5.90% (23.7)%
Mortgage-backed ..................................... 3,240 53.4 6.68 4,112 69.7 6.87 (21.2)
State and political ................................. 1,177 22.2 7.65 1,284 25.2 7.96 (8.3)
U.S. agencies and other ............................. 332 4.1 5.01 456 6.4 5.69 (27.2)
--------------------- -------------------
Total available-for-sale securities ................ 5,231 86.5 6.71 6,484 110.5 6.91 (19.3)
Unrealized gain on available-for-sale securities ..... 106 97 9.3
------- -------
Net available-for-sale securities ................. 5,337 6,581 (18.9)
Trading account securities ........................... 558 9.2 6.69 149 1.8 4.90 **
Federal funds sold and resale agreements ............. 519 4.8 3.75 719 9.7 5.47 (27.8)
Loans:
Commercial:
Commercial ......................................... 26,018 479.9 7.48 23,491 468.5 8.09 10.8
Real estate:
Commercial mortgage ............................... 8,234 173.5 8.55 8,173 181.0 8.98 .7
Construction ...................................... 3,252 71.0 8.85 2,405 56.5 9.53 35.2
-------------------- -------------------
Total commercial .................................. 37,504 724.4 7.83 34,069 706.0 8.40 10.1
Consumer:
Home equity and second mortgage .................... 7,484 174.4 9.45 5,812 137.7 9.61 28.8
Credit card ........................................ 4,013 123.3 12.46 3,982 125.4 12.77 .8
Other .............................................. 7,055 161.7 9.30 6,675 158.7 9.64 5.7
-------------------- -------------------
Subtotal .......................................... 18,552 459.4 10.04 16,469 421.8 10.39 12.6
Residential mortgage ............................... 2,996 57.4 7.77 3,936 77.7 8.01 (23.9)
Residential mortgage held for sale ................. 29 .3 4.20 183 3.1 6.87 (84.2)
-------------------- -------------------
Total consumer .................................... 21,577 517.1 9.72 20,588 502.6 9.90 4.8
-------------------- -------------------
Total loans ....................................... 59,081 1,241.5 8.52 54,657 1,208.6 8.97 8.1
Allowance for credit losses ......................... 998 1,014 (1.6)
------- -------
Net loans .......................................... 58,083 53,643 8.3
Other earning assets ................................. 1,349 20.7 6.22 563 7.6 5.47 **
-------------------- -------------------
Total earning assets* ............................. 66,738 1,362.7 8.28 62,572 1,338.2 8.67 6.7
Other assets ......................................... 9,261 8,166 13.4
------- -------
Total assets ...................................... $75,107 $69,821 7.6%
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits ......................... $13,544 $12,954 4.6%
Interest-bearing deposits:
Interest checking ................................... 6,026 25.5 1.72 5,766 24.8 1.74 4.5
Money market accounts ............................... 12,180 105.8 3.52 10,695 104.3 3.96 13.9
Other savings accounts .............................. 2,281 10.0 1.78 2,603 13.6 2.12 (12.4)
Savings certificates ................................ 10,123 125.3 5.02 11,982 163.4 5.53 (15.5)
Certificates over $100,000........................... 3,466 45.0 5.27 3,287 49.0 6.05 5.4
-------------------- -------------------
Total interest-bearing deposits .................... 34,076 311.6 3.71 34,333 355.1 4.19 (.7)
Short-term borrowings ................................ 4,104 52.3 5.17 3,203 46.4 5.88 28.1
Long-term debt ....................................... 13,967 186.1 5.40 10,534 156.4 6.02 32.6
Company-obligated mandatorily redeemable preferred
securities .......................................... 950 19.3 8.24 600 12.3 8.18 58.3
-------------------- -------------------
Total interest-bearing liabilities ................ 53,097 569.3 4.35 48,670 570.2 4.75 9.1
Other liabilities .................................... 2,378 2,161 10.0
Common equity ........................................ 6,022 5,976 .8
Accumulated other comprehensive income ............... 66 60 10.0
------- -------
Total liabilities and shareholders' equity ........ $75,107 $69,821 7.6%
======= ======= =====
Net interest income .................................. $ 793.4 $ 768.0
======== ========
Gross interest margin ................................ 3.93% 3.92%
====== ======
Gross interest margin without taxable-equivalent
increments .......................................... 3.87% 3.84%
====== ======
Net interest margin .................................. 4.82% 4.98%
====== ======
Net interest margin without taxable-equivalent
increments .......................................... 4.76% 4.89%
=========================================================================================================================
INTEREST AND RATES ARE PRESENTED ON A FULLY TAXABLE-EQUIVALENT BASIS UNDER A
TAX RATE OF 35 PERCENT.
INTEREST INCOME AND RATES ON LOANS INCLUDE LOAN FEES. NONACCRUAL LOANS ARE
INCLUDED IN AVERAGE LOAN BALANCES.
*BEFORE DEDUCTING THE ALLOWANCE FOR CREDIT LOSSES AND EXCLUDING THE UNREALIZED
GAIN ON AVAILABLE-FOR-SALE SECURITIES.
**NOT MEANINGFUL.
U.S. Bancorp 25
PART II -- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES -- On January 4, 1999, the Company issued 1,027,
276 shares of common stock with an aggregate value of $36.4 million and 56,586
shares of term participating preferred stock with restrictions with an aggregate
value of $20.0 million as consideration in connection with a merger transaction.
The preferred stock ranks prior to the Company's common stock with respect to
the payment of dividends and distribution of assets upon dissolution,
liquidation or winding up of the Company. Each preferred share has an attached
right allowing the holder to receive a number of shares of common stock upon
maturity of the term participating preferred stock. These common and preferred
shares were issued in a private placement transaction exempt from registration
under Section 4(2) of the Securities Act of 1933.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS -- The 1999 Annual
Meeting of Shareholders of U.S. Bancorp was held on Tuesday, April 20, 1999, at
the Minneapolis Convention Center. John F. Grundhofer, Chairman, President and
Chief Executive Officer, presided.
The holders of 623,535,296 shares of common stock, 85.9 percent of the
726,039,362 outstanding shares entitled to vote as of the record date, were
represented at the meeting in person or by proxy. The candidates for election as
Class I Directors listed in the proxy statement were elected to serve three-year
terms expiring at the 2002 annual shareholders' meeting. The proposal to ratify
the appointment of Ernst & Young LLP as the Company's independent auditors for
the year ending December 31, 1999, was approved. The proposal to approve the
U.S. Bancorp 1999 Stock Incentive Plan was approved. The shareholder proposal
for the annual election of all Directors and the elimination of the Company's
classified Board of Directors, was not approved.
SUMMARY OF MATTERS VOTED UPON BY SHAREHOLDERS
Number of Shares
----------------------------------------------------
For Withheld
- - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------
Election of Class I Directors:
Linda L. Ahlers 618,136,921 5,398,375
Robert L. Dryden 618,101,994 5,433,302
Joel W. Johnson 617,984,240 5,551,056
Edward J. Phillips 618,116,029 5,419,267
Warren R. Staley 618,048,294 5,487,002
----------- ---------
For Against Abstain Non-Vote
- - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------------------------
Other Matters:
Ratification of appointment of Ernst & Young LLP
as independent auditors 612,960,104 5,636,998 4,938,194 0
Approval of 1999 Stock Incentive Plan 456,299,343 73,580,919 7,679,509 85,975,525
Proposal for the annual election of all Directors 250,068,474 265,953,687 21,484,271 86,028,864
For a copy of the meeting minutes, please write to the Office of the Secretary,
U.S. Bancorp, 601 Second Avenue South, Minneapolis, Minnesota 55402-4302.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
(1) 4.1 Certificate of Designation and Terms of Term Participating
Preferred Stock of U.S. Bancorp. Filed as Exhibit 4.1 to
Registration Statement on Form S-4, File No. 333-75603.
10.1 U.S. Bancorp 1999 Stock Incentive Plan*
12 Computation of Ratio of Earnings to Fixed Charges.
27 Article 9 Financial Data Schedule.*
(1) EXHIBIT HAS HERETOFORE BEEN FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION AND IS INCORPORATED HEREIN AS AN EXHIBIT BY REFERENCE.
* COPIES OF THIS EXHIBIT WILL BE FURNISHED UPON REQUEST AND PAYMENT OF THE
COMPANY'S REASONABLE EXPENSES IN FURNISHING THE EXHIBIT.
(b) REPORTS ON FORM 8-K
During the three months ended March 31, 1999, the Company filed the
following Current Report on Form 8-K.
Form 8-K dated January 20, 1999, relating to the announcement of the
Company's fourth quarter and full year 1998 earnings.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
U.S BANCORP
By: /s/ TERRANCE R. DOLAN
----------------------------------------
Terrance R. Dolan
Senior Vice President and Controller
DATE: May 13, 1999 (Chief Accounting Officer and Duly
Authorized Officer)
26 U.S. Bancorp
----------------
[LOGO] US BANCORP(R) First Class
U.S. Postage
U.S. Bank Place PAID
601 Second Avenue South Permit No. 2440
Minneapolis, Minnesota Minneapolis, MN
55402-4302 ----------------
www.usbank.com
SHAREHOLDER INQUIRIES
COMMON STOCK TRANSFER AGENT AND REGISTRAR
First Chicago Trust Company of New York, a division of EquiServe, acts as
transfer agent and registrar, dividend paying agent, and dividend reinvestment
plan agent for U.S. Bancorp and maintains all shareholder records for the
corporation. For information about U.S. Bancorp stock, or if you have questions
regarding your stock certificates (including transfers), address or name
changes, lost dividend checks, lost stock certificates, or Form 1099s, please
call First Chicago Trust's Shareholder Services Center at (800) 446-2617.
Representatives are available weekdays 8:30 a.m. to 7:00 p.m. Eastern time, and
the interactive voice response system is available 24 hours a day, seven days a
week. The TDD telephone number for the hearing impaired is (201) 222-4955.
First Chicago Trust Company of New York
c/o EquiServe
Mailing address: P.O. Box 2500, Jersey City,
New Jersey 07303-2500.
Telephone: (201) 324-0498
Fax: (201) 222-4892
Internet address: http://www.equiserve.com
E-mail address: fctc@em.fcnbd.com
If you own shares in a book-entry or plan account maintained by First Chicago
Trust, you can access your account information on the Internet through First
Chicago Trust's Web site. To obtain a password that provides you secured access
to your account, please call First Chicago Trust toll free at (877) THE-WEB7
(outside North America call (201) 536-8071).
COMMON STOCK LISTING AND TRADING
U.S. Bancorp Common Stock is listed and traded on the New York Stock Exchange
under the ticker symbol USB.
DIVIDENDS
U.S. Bancorp currently pays quarterly dividends on its Common Stock on or about
the 15th of March, June, September and December, subject to prior Board
approval. Shareholders may choose to have dividends electronically deposited
directly into their bank accounts. For enrollment information, please call First
Chicago Trust at (800) 446-2617.
DIVIDEND REINVESTMENT PLAN
U.S. Bancorp shareholders can take advantage of a plan that provides automatic
reinvestment of dividends and/or optional cash purchases of additional shares of
U.S. Bancorp Common Stock up to $60,000 per calendar year. For more information,
please contact First Chicago Trust Company of New York, c/o EquiServe, P.O. Box
2598, Jersey City, New Jersey, 07303-2598, (800) 446-2617.
INVESTMENT COMMUNITY CONTACTS
John R. Danielson
Senior Vice President, Investor Relations
(612) 973-2261
john.danielson@usbank.com
Judith T. Murphy
Vice President, Investor Relations
(612) 973-2264
judith.murphy@usbank.com
FINANCIAL INFORMATION
U.S. Bancorp news and financial results are available through the Company's Web
site, fax, and mail.
WEB SITE. For information about U.S. Bancorp, including news and financial
results, product information, and service locations, access our home page on the
World Wide Web. The address is http://www.usbank.com.
FAX. To access our fax-on-demand service, call (800) 758-5804. When asked, enter
U.S. Bancorp's extension number, "312402." Enter "1" for the most current news
release or "2" for a menu of news releases. Enter your fax and telephone numbers
as directed. The information will be faxed to you promptly.
MAIL. At your request, we will mail to you our quarterly earnings news releases,
quarterly financial data on Form 10-Q, and additional annual reports. To be
added to U.S. Bancorp's mailing list for quarterly earnings news releases, or to
request other information, please contact:
Investor Relations
(612) 973-2263
U.S. Bancorp
601 Second Avenue South
Minneapolis, Minnesota 55402-4302